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Know the West

'A pimp in the family'

Tribes get into the payday lending game.


Mariah Tsosie* needed cash. She worked 32 hours per week for $11 an hour, but her ex-husband often failed to send child support, and Tsosie, who has three kids, fell behind on her bills. She lacked credit cards, and her friends and family were as strapped as she was.

But there were other options in Farmington, New Mexico, where she lived on the edge of the Navajo Nation: Dozens of modest storefronts emblazoned with colorful, beckoning signs – "FastBucks," "Quik Cash" or "Check 'N Go." These so-called "payday lenders" offer payday, short-term installment, car title or tax refund anticipation loans to tide folks over until their next paycheck.

Tsosie picked Cash Loans Now, where friendly staffers assured her that a $200 installment loan would cost her just a few dollars per day. A couple weeks later, she made the first of 25 biweekly payments of $90 each. Thanks to an annualized interest rate of 1,147 percent, about 100 times the average credit card rate, eventually she would have forked out $2,360 – nearly one-tenth of her yearly earnings – just for a tank of gas and some groceries.

Tsosie's plight is common, and so are her extreme loan terms. Finance regulations have deteriorated over the past three decades, and the small-loan industry thrives during tough economic times. Storefronts cluster in areas where traditional banks are few and the working poor are plentiful. And reservation border towns have become a gold mine: Farmington, with just 46,000 people, has 55 active small-loan licenses, outnumbering its fast-food joints; Gallup, New Mexico, has 46, about 40 times the national per capita concentration. Residents of Montana's Native counties took out refund anticipation loans – which target those who are eligible for low-income federal tax credits – at a rate three-and-a-half times that of non-Indian counties; in North Dakota, the ratio was 12:1. Nearly 60 percent of Native Americans use alternative financial services, including payday-type loans, compared to 38 percent of whites.

"Payday lending and pawn shops have established themselves as the primary financial services firms for most Native people," says Sarah Dewees of First Nations Development Institute, a nonprofit in Longmont, Colorado. Millions of dollars in exorbitant interest rates and fees are siphoned from Native Americans' pockets and reservation economic development efforts every year and converted to corporate profits.

It's the latest chapter in the story of the exploitation of Native Americans. There's a surprising plot twist, though: In recent years, some tribes have embraced online payday lending for economic development, just as others have turned to gaming, energy development or other businesses that often victimize tribal members. They've even used their status as sovereign nations to skirt state laws. But as the fight over online lending reaches the courts, some fear that using tribal sovereign immunity to defend the industry could backfire – that the tribes have mortgaged their future for the sake of quick cash.

Lawmakers have tried to rein in the industry. In 2006, Congress passed a law protecting military service members from predatory lenders, but not the general public. The Consumer Financial Protection Bureau, created by the 2010 Frank-Dodd Wall Street Reform Act, pushed big banks and firms out of the refund anticipation loan business. But First Nations Development Institute found that many tax preparers in Indian Country have escaped its reach; Liberty Tax Service, for example, simply works with non-federally regulated businesses to offer refund loans. Last year, it raked in $10 million in tax preparation fees and $30 million from "financial products."

Some tribes have also cracked down, but enforcement off-reservation, where most lenders are based, is difficult. And now that lenders have migrated to cyberspace, it's even tougher. In 2007, New Mexico's Legislature banned certain kinds of payday loans, but lenders simply rejiggered their offerings to skirt the rules. This year, Idaho and Utah also tried to regulate the industry but failed.

That's partly because payday loans provide a necessary – if overpriced – service for the "underbanked." Banks can be intimidating, and in the rural West, they're often distant, which helps explain why Nevadans, Montanans, New Mexicans and Arizonans are some of the heaviest users of alternative financial services. Getting loans is a long, tedious process, and other options are simply not available for those with poor credit.

The industry has also spent heavily to fight regulation. The Community Financial Services Association, which watches out for payday lenders' interests, has contributed over $1.6 million to campaigns and poured $19 million into lobbying since 1999, according to the Center for Responsive Politics. QC Holdings, Security Finance Corp. and Cash America International, all with various outlets in Indian Country, dumped cash into recent elections.

They've bought powerful allies. Last year, 31 House Republicans – most of whom have benefitted from the industry's largesse – sent a letter to the Obama administration arguing that its efforts to edge out online payday-type lenders would "adversely impact tens of millions of low-income American families who depend on short-term credit provided by online lenders." If it was shocking to see the GOP stand up for the working poor, perhaps even more startling was that some Native Americans took the lenders' side, too, claiming that federal and state crackdowns violate their right to self-determination and wreak havoc on their efforts to build economies and offset federal budget cuts.

In cubicles crammed with pictures of their kids and funny quotes, they typed and chatted into headsets with people in other states. A sign on the wall read: "My job provides my family & I with a sense of security, Thanks 2 you." It was a common sentiment among the more than 100 employees of the call centers in Eagle Butte and nearby Timber Lake, both run by Western Sky – the biggest private employer in this impoverished part of South Dakota.

Last fall, the online lender laid off every employee, mostly members of the Cheyenne River Sioux Tribe. Various states and the feds had gone after the company for violating interest rate caps and other usury laws. Company owner Martin "Butch" Webb, a tribal member, argued that Western Sky was immune because it operated on the reservation. But the tribe didn't own the business, and refused to back the company in court.

Western Sky is an outlier, though: Most Native American online lenders are owned by tribes. This allows them to legally invoke tribal sovereign immunity, even though their firms rarely headquarter on reservations or employ tribal members.

The issue first hit public consciousness in 2005, when Colorado's attorney general subpoenaed Cash Advance and Preferred Cash Loans. The online lenders, owned respectively by the Miami Tribe of Oklahoma and the Santee Sioux Tribe of Nebraska, responded that they were beyond the state's legal reach: The Supreme Court ruled in 1998 that tribes and their "arms" have sovereign immunity from contract lawsuits, even when they involve off-reservation business. Colorado courts vindicated the companies' claims – an apparent victory for tribal sovereignty and Internet commerce.

Yet when Colorado started its investigation, the companies weren't yet affiliated with tribes. They were owned and operated by companies controlled by Scott Tucker, who turned them over to the tribes that year. According to a Center for Public Integrity investigation, Tucker made millions off payday lending and flaunts it: He owns an $8 million Aspen home and 15 racecars. He still appears to be the businesses' de facto operator and primary profiteer; the tribes essentially shield his companies from state regulators in exchange for 1 to 2 percent of the gross revenues. Most of the small number of tribes in the business have similar arrangements.

Since tribal finances are confidential, and the tribes involved won't talk, it's difficult to gauge their reward. But details from court cases suggest a tribe could make $10 million or more annually. "(Most of) the tribes that are doing this are incredibly poor," says Indian law expert Matthew Fletcher of Michigan State University. "They are not gaming tribes. They do not have natural resources. They are doing this because they have to."

But University of New Mexico law professor Nathalie Martin, who has written extensively on payday lending, wonders if the payoff is worth the risk. Media coverage of tribal online lending has portrayed an explosion of the "sovereign model," with dozens of tribes exploiting unwitting consumers to rake in big profits. In fact, very few tribes are involved, and their smaller stake means modest revenues. Combine that with short-term lending firms' unfavorable reputation and their "sham" arrangements with tribes, and the public may begin believing tribes are abusing their sovereign immunity.

If and when a "rent-a-tribe" case advances far enough, Martin worries, it might give the U.S. Supreme Court, which is already hostile to tribal sovereignty, an excuse to eviscerate it, with implications reaching far beyond online lending. Even Congress, egged on by storefront payday lenders, states' rights advocates and those who want to disempower tribes, could move to limit sovereign immunity. "Sovereignty is so important," says Martin. "Tribes shouldn't use it lightly."

For the most part, tribal lenders' websites are indistinguishable from those of other online lenders: Smiling faces, cheerful icons, a lot of green. Nor are the terms much different: Average interest rates are at least 300 percent. And their customer profile is generally the same as storefront lenders': lower-income working class and minorities. Which means that in some cases, members of tribes affiliated with lenders are customers – or victims – of those same lenders. Consumer advocates compare the dynamic to economically troubled tribes opening their land to radioactive waste dumps, or buying a coal mine to fuel a power plant that poisons tribal land and air.

Outspoken Native scholar and journalist Charles Trimble made a different comparison in a 2011 Indian Country Today column, which he still stands by. Whether the tribes own the businesses, he wrote, or are just being rented, "it is rotten to the core and taints and weakens the sovereignty of all tribes. It's like having a pimp in the family; he shames everyone, but you can't disown him because he is family."

*The name has been changed.